Euro-area
finance ministers agreed to tax bank deposits in Cyprus in an unprecedented measure to
forge a 10 billion-euro ($13 billion) rescue plan. Cyprus will impose a levy of 6.75 percent
on deposits of less than 100,000 euros -- the ceiling for European Union account
insurance -- and 9.9 percent above that.

The euro
zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros
($13 billion), but demanded depositors in its banks forfeit some money to stave
off bankruptcy despite the risks of a wider bank run.

Cypriot
Finance Minister Michael Sarris said a planned levy on bank accounts in the
country to help shore up its finances will involve compensation for depositors
in the form of shares in the financial institutions.

European
Union Economic and Monetary Commissioner Olli Rehn said there won’t be a repeat
of the tax on bank deposits that was imposed as part of Cyprus’s aid program. Asked whether a
future EU-mandated bank levy can be categorically ruled out, Rehn said that “it
can and there is no concrete case where it should be considered.”

The euro
zone struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros
($13 billion), but demanded depositors in its banks forfeit some money to stave
off bankruptcy despite the risks of a wider run on savings.

Germany's finance minister said on Saturday
he would ask parliament to agree the outline of a euro zone bailout for Cyprus as soon as possible, to allow the
island's international lenders to hammer out details.

Euro zone
ministers struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros
($13 billion) to stave off bankruptcy. Under the program, the island's debt
should fall to 100 percent of economic output by 2020.

This is a
breach of fundamental property rights, dictated to a small country by foreign
powers and it must make every bank depositor in Europe shiver.

Why today's Cyprus bailout could be the start
of the next financial crisis – Wonkblog
/ WP

European
officials have spent the past six years moving heaven and earth to ensure that
no depositors with the continent's banks suffer a loss despite the financial
strains the banks have been under… So is Cyprus different?

Cyprus state broadcaster CyBC reported on
Saturday that German Finance Minister actually entered the Eurogroup meeting on
Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated
on Saturday that this had also been the proposal of the International Monetary
Fund.

One general
principle that the EU continues to pursue is tightening the linkage between
solvency and sovereignty. This is vital and the basis upon which a more
integrated Europe will be built. To
the extent one becomes less solvent, one must surrender greater sovereignty.
Cyprus was insolvent. A large swath of its
sovereignty has been ceded to the EU.

The clear conclusions
to us are that the Troika have gone too far, and Eurozone deposit insurance is
now worthless. The Troika have let the cat out of the bag, and we do not think
it likely that this will eventually be implemented as it is likely to result in
protests, serious rioting, and possible assassinations (given the alleged
involvement of the Russian mafia). The market reaction to this is likely to be
rather bad.

If the
banking sector is too big, and if bank losses are too big, relative to the country's
ability to pay, deposit insurance as a way to prevent bank runs is not credible
and won't work in a country that cannot print.

The big
winner here is the ECB, which has extended a lot of credit to dubiously-solvent
Cypriot banks and which is taking no losses at all. And although they might
wake up bruised, the big Russian depositors are probably winners too, given
that they risked losing everything and will end up losing just 10%. Finally, of
course, there are all the hedge funds who have been betting that the Cypriot
government won’t default: they’re all popping Champagne right now.

The problem
isn't that Cypriot depositors have to make a co-pay, but that the co-pay costs
are not being divvied up among Cypriot depositors and the other creditors and
equityholders of Cypriot banks either per absolute priority or ratably.

Mohamed
El-Erian: European officials were right to look for a bold approach for Cyprus. But in compromising excessively on
critical design elements, they risk ending up in the disruptive muddled middle:
not going far enough to solve the country’s problems, and not being
sufficiently careful in containing potential negative externalities.

For the
fact is that deposit insurance everywhere in the EU has now been undermined.
The precedent has been set for insured depositors to suffer losses in order to
protect Russian oligarchs and reckless banks. If the Eurogroup can impose this
on Cyprus, it can do so elsewhere too.

Cyprus Parliament To Delay "Rescue" Vote
Due To Lack Of Support, Despite ECB Pressure For Pre-Trade Open Decision – ZH

The Bank of
Spain said on Saturday there were no signs of capital flight from Spain as a result of developments in Cyprus, where euro zone ministers are
demanding that depositors forfeit some of their savings to avert bankruptcy.

Cyprus was
working on a last-minute proposal to soften the impact on smaller savers of a
bank deposit levy after a parliamentary vote on the measure central to a
bailout was postponed until Monday, a source said.

Germany's
finance minister said on Sunday Berlin would have respected the bank deposit
guarantee on small savers' insured deposits but the Cypriot government,
European Commission and European Central Bank (ECB) decided against this.

By waiting until
the Italian elections were over, the EU painted itself into a corner with Cyprus. Lacking other options, it was
forced to go to the pockets of ordinary depositors, giving birth to fears of
bank runs in Europe.

Shocking, I
know. Who could have predicted that the populous would react poorly to an
assault on depositors? Everyone. Everyone would have predicted this.
Everyone except, apparently, European policymakers.

The sudden
eruption of panic could still be contained; European officials on Sunday night
were looking to revise the terms of the agreement ahead of a vote on the rescue
package in the Cypriot parliament, in order to shield smaller depositors.

The
possibility that depositors in larger economies might worry for the value of
their savings, leading to panic and self-fulfilling crises elsewhere…The more
damaging effect may be the continued erosion of faith in the legitimacy of
democracy in the euro zone.

Ultimately
the defence would seem to be that it was always clear a great deal of trust
would be lost in governments forever as the price of passage through this
crisis, and Cyprus was no different. Frankly, I think
if we take up this political quietism and do not restore that trust, the crisis
will be never-ending.

Changing
the ratios would be significantly more progressive, obviously. We’ll find out
soon whether such a change will indeed be made, and (just as important) whether
it would still get enough votes to pass the Cypriot parliament.

Charles
Wyplosz: The Cyprus bailout package contains a tax on bank deposits. This
column argues that the tax is a deeply dangerous policy that creates a new
situation, more perilous than ever. It is a radical change that potentially
undermines a perfectly reasonable deposit guarantee and the euro itself.
Historians will one day explore the dark political motives behind this move.
Meanwhile, we can only hope that the bad equilibrium that has just been created
will not be chosen by anguished depositors in Spain and Italy.

But what we
do know is that, once again, the terms "bank run" and "loss of
confidence" are making the rounds in all of the Chief Strategist notes and
the macro masturbation newsletter complex. We don't want to hear terms like
these.

…while I
think it is absolutely moronic, I also think it is worth putting in context.
One thing that people miss is that there are a lot of threats to wealth.
One is taxes, one is outright confiscation, and one is inflation.

For the
fact is that deposit insurance everywhere in the EU has now been undermined.
The precedent has been set for insured depositors to suffer losses in order to
protect Russian oligarchs and reckless banks.

Before you panic, take a moment to
think about Cyprus et al – TradingFloor

I cannot
urge this strongly enough, do not panic! The dust is far from settled and there
will be plenty more of it in the days to come. Instead of trying to outsmart
political sound bites using spot FX, look at the viable alternative of FX
options.

The finance
ministers insist it is a one-off (as they did for Greece) but if investors and bank
customers fear a precedent has been set, there could yet be a serious backwash
for the euro zone. And all this for six billion euros?

Should
depositors in Cyprus or other peripheral countries feel
safe now? They may not. After all, deposit guarantee schemes do not guarantee
against a levy. Depositors may also have to factor in that the one-off levy
could inspire national governments to do the same thing. So the risk of bank
runs has just gone up.

Cyprus's parliament votes on Monday on a
plan to seize money from bank deposits as part of an EU bailout, a move that
has sent a shiver across the bloc, caused the euro to tumble and stock markets
to dive.

Standard
and Poor's sees a high risk that Spain, Italy, Portugal and France will not be
able to carry through necessary reforms as the unemployed become less willing
to put up with austerity, S&P's Germany head Torsten Hinrichs told a
newspaper.

There
probably won’t be any immediate contagion from Cyprus to other crisis countries. After
all, banking systems in Greece, Spain, Portugal and Ireland have recently been recapitalised.
Meanwhile, the combination of Cyprus’ relatively huge banking sector and
the fact that it is perhaps small enough to experiment with make it a special
case. Even so, citizens in the rest of the euro zone now know that, if push
comes to shove, their insured deposits could be grabbed too.

Tomorrow, Cyprus could vote to leave the euro. This is
political dynamite
– The
Telegraph

If the Cyprus deal represents a more assertive German
approach, it will be far more difficult to actually trigger the OMT as that, in
turn, depends on whether the debtor country will agree to be put on a bailout
programme, with tough conditions (a prerequisite for it to tap the OMT). Cyprus is small enough to boss around, but
Italy or Spain?

In 2011
alone, some $80 billion flowed out of Russia and much of that money had been
channelled though Cyprus, according to the BND. Russians have deposited $26
billion in Cypriot banks, says the BND. That is well above the annual GDP of Cyprus.

It has to
be impressed on Germany that crises are a lot more
"Run Lola Run" or "The Great Escape" than
"Faust": the point is to get out with minimum collateral damage first
and mete out punishments and lessons in morality second

Satyajit
Das: It would be ironic if Cyprus, one the smallest countries in Europe with
little over 1 million people and about 0.5% of the European Union (“EU”)
economically, were to prove a key inflexion point in the crisis.

European
policy makers signaled flexibility on the application of an unprecedented bank
tax in Cyprus, seeking to overcome outrage that threatens to
derail the nation’s bailout. European shares and the euro fell.

It is a
pity that the Cyprus deal had some major drawbacks,
despite the good intentions, and the lack of adequate information on the
details of the financial assistance programme raises a large number of
concerning questions.

This was a
deliberate policy decision and not one based in economics. After all the size
is rather small, only 17billion. In other words, they chose the option to cut
the deposits not because they had no other option but because they wanted to
pass a political message.

European
policy makers signaled flexibility on the application of an unprecedented bank
tax in Cyprus, seeking to overcome outrage that threatens to
derail the nation’s bailout. European shares and the euro fell.

In our
view, the bailout does not change the overall picture for the Euro area here
and now even if the final bailout terms include a depositor haircut on deposits
below 100k, which is the EU limit for deposit guarantees per bank. Indeed,
there is little reason to expect serious contagion or outright bank runs in the
periphery at the moment… However, the current deal clearly increases the
longer-term risks.

Don’t Panic! Cyprus Will Adopt the Tax on Deposits and be
Forgotten Again – WSJ

Equity
benchmarks for Italy and Spain underperformed their European
counterparts today following news of the proposed Cyprus bank bailout, but
credit markets in both countries have seen a muted reaction.

After Cyprus, eurozone risks transmission
failure and running out of road – ekathimerini

This is the
point at which the links within the eurozone will begin to pop apart, when
citizens will turn to Beppe Grillo-style solutions, to nationalists, extremists
or to anyone who promises a different path. This is the point at which the
vehicle stops functioning and the road ends.

Germany’s role in imposing the euro bloc’s
first levy on bank deposits, in Cyprus, shows Chancellor Angela Merkel’s
dilemma in explaining to voters facing September elections why they should pick
up the tab for another bailout.

When it
comes to an imposed hit, any differentiation must be made on the basis of risk
awareness of those who could be hit…the plan also hits regular savers who had considered
themselves to be protected…This mistaken differentiation, not the imposed
debt-equity swap per se, is the enormous error underlying the Cypriot plan.

The
decision to tax ordinary savings accounts at Cypriot banks as part of a €10
billion EU bailout package has been met with sharp backlash at home and abroad.
The measure signifies a new level of escalation and could be too risky, German
commentators say on Monday.

Steen
Jakobsen: Whatever happens this week on the design of the levy on deposits it
will constitute a major change where a financial tax is now more likely than
ever despite the assurances of this being a one-off. We explore four key
conclusions.

Let the old
banks go bankrupt, leaving the ECB with EUR 9bn of losses and wiping out both
the subordinated & senior bondholders (EUR 1.75bn). These new banks are now
adequately capitalised & under EU law, the ECB will not be able to prevent
their participation in Target 2 via the Central Bank of Cyprus. The ECB may well kick &
scream, but there will be nothing they can do about it.

Cypriot
lawmakers are supposed to vote today on a bailout that hits at least some of
its bank depositors but the president’s spokesman has said any such legislation
is unlikely to pass. This could be brinkmanship but it doesn’t sound like it.

Why now?
European depositors’ money began to flow out of Cyprus’ banks back in 2010. Indeed, most
European depositors have already found the exit door. Over that same period,
non-Europeans (read: Russians) have increased their Cypriot exposure.

Nicos
Anastasiades is between a rock and a hard place. On one side there’s Cypriot
citizens and official creditors — all, it seems, not liking the levy on
deposits below €100,000 — and on the other, Russia.

What this
should reaffirm to you all is how the handling of the crisis has only succeeded
in heightening the risks associated with this current monetary order. The
excessive amounts of debt have continued to grow and are clearly not
sustainable. Policymakers have resorted to draconian methods of expropriating
private sector assets (households, pension funds and corporates) either by excessive
explicit ‘taxation’ and/or stealth taxation administered by a policy of
negative real rates to help reduce the fixed real burden of debts.

Whatever
path is chosen, they need to move quickly. The bank holiday is
unsustainable for long on political and economic grounds, and if not resolved
the question of euro exit could move to center stage.

How does
that not completely and utterly destroy the banking insurance system? Can the
answer really be, “Your deposits are safe and fully insured, unless the federal
government decides to arbitrarily take money out of them?” And if that is the
actual deal being offered, then isn’t the banking insurance worthless? Why
would you bank in the euro zone rather than, say, the United Kingdom?

…whether this
evening’s vote on the bailout will go ahead is till unclear, let alone what the
outcome will be — a question being asked by Credit Suisse’s William Porter and
team seems apropos: What if they’re not “stupid”?

That’s the
result of Cypriot MPs’ vote on the current version of the bank deposit levy,
rejecting it as a condition of the island’s bailout. That is the first no, after
all these years and the bailouts, to the Troika.

Former Cyprus Central Banker Goes Off On The EU
And Says The European Project Is Dying – BI

Cypriot and
European officials are discussing capital controls for when banks are due to
open next Tuesday. Meanwhile the IMF is coming up with a plan to merge Cyprus’ two biggest banks into a ‘bad
bank’, a source told the pair. The IMF wouldn’t be drawn on that. Where does
the ECB stand in all this?

The slow
motion Cypriot car crash of the past five days reached impact point last night
when not a single lawmaker voted for the bailout with bank levy attached – the
first time a euro zone legislature has simply said no. So what next?

What is
going on in Cyprus? With the Cypriot parliament
rejecting a bailout deal, and the EU standing tough, who will blink first?
Could a proposed bank levy still go ahead and trigger a run on banks in other
countries?

Cypriot
leaders held crisis talks on Wednesday to avert financial meltdown after
rejecting the terms of a European Union bailout and throwing efforts to rescue
the latest casualty of the euro zone debt crisis into disarray.

The ECB
will not provide Cypriot banks with liquidity indefinitely unless a bailout is
agreed and banks there may not be able to reopen this week as a result,
Austrian Finance Minister Maria Fekter said.

Officials
from the so-called troika are in Cyprus discussing further capital controls
and the possible extension of a bank holiday through to the end of the week, a
European official familiar with the talks said on condition of anonymity
because the discussions are confidential.

If a reasonable
compromise is not reached, the Cypriot parliament does not reconsider,
euro-area partners do not backtrack, and Russia does not step in, then we will
witness a full meltdown of the financial system of Cyprus, bringing misery to its citizens.
It could also endanger Cyprus’s membership of euro-area, bringing
even more harm to the Cypriots. There has to be an agreement.

Eurozone
leaders’ radical step of putting insured depositors in Cypriot banks in harm’s
way was not their only option. This column argues that none of the alternatives
were pleasant but some were less ominous.

The Cyprus rescue package has elicited sharp
reactions. This column argues that a tax on deposits is logical given the
limited options, but guaranteed deposits should be spared on fairness and
systematic grounds; a 15% tax on big deposits would be enough. Contagion is unlikely
since Cyprus is different. Italian and Spanish
savers are already alert to surprises such as the 1992 Italian bank deposit tax.

The latest
chapter in the euro-zone crisis is no longer just about Cyprus. The tiny island's decision to
reject the Troika's bailout plan and seek help from Moscow has tipped the episode into a new
world of geopolitics and Western security.

The most
striking thing about the situation is that broader markets are taking
assurances that Cyprus is a unique case at face value.
European equities are flat for the week, and yields on peripheral sovereign
debt have scarcely budged. Contagion looks like a non-issue. For that, at
least, we can be thankful. Unless it leads to European Commission complacency,
of course, leading officials to drive an even harder bargain—an possibly
precipitate the sort of action, like a Cyprus exit, that might just send markets
into a proper swoon. Things, we should have learned by now, can always get
worse.

One of the
striking features of the Cyprus crisis is the extent to which the
ECB is driving the process. It was their threat to stop the flow of easy
money to Cyprus that forced agreement on the
earlier failed tax plan. Now, their threat to cut Cyprus’ access to Emergency Liquidity
Assistance (ELA) if the government does not have an EU-IMF approved program in
place by Monday accelerates events.

The ECB
Thursday seriously upped the ante in the Cyprus crisis. The Frankfurt-based
rate-setters announced that if Cyprus didn’t finally iron out a deal with
international creditors by Monday, then the ECB would cut off emergency funding
to the country’s banks.

Euro zone finance
officials acknowledged being "in a mess" over Cyprus during a conference call on
Wednesday and discussed imposing capital controls to insulate the region from a
possible collapse of the Cypriot economy.

Clearly,
the risk of an exit from the euro area has increased. Many of
the critics of EMU, who think it is better to be out, may be able to test their
hypothesis. We think Cypriots' lives will be made significantly worse on
an exit.

The task
was never going to be an easy one: impose losses worth about €5.8 billion on
lenders to the Cypriot government and depositors with the country’s banks. And
now the rejection of that effort has led Europe to its latest impasse.

Suddenly, Russia has become a central player in the
Cypriot financial crisis. On the very evening after the Cypriot parliament
rejected a proposed levy on bank deposits that the Cypriot president had
previously accepted as a condition for a bailout package of €10 billion,
Finance Minister Michael Sarris flew from Nicosia to Moscow.

Euro Official On Cyprus: "Markets Believe We Will Find A
Solution, This Might Not Be The Case" – ZH

A small
country cleans up its act and joins the international financial community.
Money pours in from abroad. The cash is spent or lent unwisely under the noses
of inattentive or ineffectual regulators. When losses mount, the money flows
out as quickly as it came in. In the end, it’s the little guys who lose the
most.

The
European Union gave Cyprus till Monday to raise the billions
of euros it needs to secure an international bailout or face a collapse of its
financial system that could push it out of the euro currency zone.

There was
no official red flag that Cyprus's oversized banking sector posed a
big risk to its economy until last year, when the European Union set up tools
to monitor such imbalances, a Reuters review of EU reports dating back to 2003
showed.

Baltic
state and euro zone aspirant Latvia, already home to sizeable deposits
of Russian money, is not expecting an increase in flows of deposits due to the
woes in Cyprus, its bank regulator said on Thursday.

What’s
amazing about this fiasco is that Europe’s leaders had almost a year to think about how
to avoid it. Ever since Greece restructured its government debt,
which made up a large share of Cypriot banks’ investments, it has been apparent
that the banks would need a major recapitalization.

The disastrous financial situation in Cyprus is
largely a result of the country's crumbling banks. For years, the island nation
profited from its bloated financial sector, but now it will likely have to
liquidate its two largest banks. In Nicosia,
government leaders fear that could decimate the economy.

Saying it cannot guarantee emergency liquidity funding
to Cypriot banks beyond Monday, the European Central Bank is pressuring Nicosia to find
the 5.8 billion euros needed to ward off insolvency. Leading politicians on
Thursday agreed to establish a "solidarity fund" and rejected any
kind of bank levy.

Be it the
German finance minister, ECB officials or the head of the Eurogroup - they all
agree on one thing: Cyprus must scrap its "unsustainable
business model" based on low taxes and attracting large amounts of bank
deposits from abroad, mainly Russia.

We want to
summarize reactions among politicians and German press views. The Eurogroup set
up the details of a EUR 10 billion bailout package for Cyprus on Saturday, 16 March. This
programme was heavily criticized in Germany, especially due to the tax on deposits
below EUR 100 000. Yet, the Cypriot Parliament voted against this measure on
Tuesday which is widely perceived as blackmail in Germany. Most commentators insists that
Cyprus needs to come up with the agreed EUR 6 billion in order to receive the
remaining sum from its European partners.

Cyprus is
thus in the early stages of experiencing what it would do were it to leave the
Euro: (i) a household liquidity crisis, (ii) a paralysed financial system,
(iii) a collapse in monetary velocity, (iv) a large loss of national wealth,
(v) capital controls, (vi) shortages of imported basic goods [trade credit for
Cyprus now non-existent],and (vii) an
exceptionally deep recession.

Europe, the ECB and the IMF have put a gun
to Cyprus’ head. The threat has been made public – you
do as we say and seize depositor’s money or else…Either Cypriot members of
parliament ignore the will of the Cypriot people or the ECB stops supporting
Cypriot banks and they implode.Which
would mean either Cyprus leaves the Euro and re-introduces
its own currency (which it could do)or
it tells its people that ALL their money is now gone.

There’s no doubt that
the best outcome for Cyprus, and for the EU, would be for Russia to
extend its help now, before Cyprus’s banks reopen on Tuesday. But
Russia doesn’t want what’s best for Cyprus, or for the EU: Russia
wants what’s best for Russia. And the way it’s acting reminds me
of nothing so much as a classic Wall Street bear raid, designed to
drive down the price of something you want to be able to pick up
very, very cheap. What’s more, it might even work.

As we’ve indicated, the
big risk coming out of the cramdown of Cyprus is a resumption of the
flow of deposits out of periphery countries, which had been underway
last year but was arrested by the introduction of the OMT. You’d be
nuts to keep your money in a Spanish bank after the brutal treatment
of Cypriot depositors.

Unlike in previous
euro-crisis episodes, there is little the ECB can do alone. The
problem is fiscal at the core and must be addressed by elected
leaders. They may conclude that it is best to let Cyprus default,
impose capital controls, and leave the euro area, an option that was
reported to be explicitly considered in European policy circles. But
such a move would violate the promise of European leaders to ensure
the integrity of the euro area, no matter what, and potentially set
off a chain reaction, including possible bank runs in other euro area
member states, starting with the most fragile ones, such as Slovenia
and of course Greece.

While I don't know how
significantly confidence in the eurozone periphery's banks have been
shaken by this week's events, I do have an idea of what I will be
keeping an eye on over the coming weeks and months: deposits in banks
in Greece and Spain.

European and Cypriot
officials were locked in talks to find a formula to avert the
Mediterranean island’s financial collapse, struggling to forge
consensus on a bailout package before the ECB cuts funding.

Cyprus aims to complete a
plan today to meet the terms of a European bailout that may include
tapping bank deposits, its finance minister said, as the
Mediterranean island races to avert financial collapse.

Two possibilities - Either
this was a completely bungled effort in Brussels. Or this this was a
deliberate effort to weed out the weak members of the EU. If the
intent was the latter, this will not stop will little Cyprus.

Cyprus conceded on
Saturday to a one-off levy on deposits over 100,000 euros in a
dramatic U-turn as it raced to satisfy European partners and seal an
11th-hour bailout deal to avert financial collapse.

It’s tempting to dismiss
events in Cyprus as insignificant. Mainstream politicians and
investors, desperate to keep the flame of Western recovery flickering
and the asset price rally on track, insist that the country is “a
special case”.

If capital controls are
introduced in Cyprus, it is the end of the single currency in all but
name – The
Telegraph

Angela Merkel is known for
her measured approach to even the most controversial issues. The
crisis in Cyprus, however, has enraged the German chancellor. In
parliamentary meetings on Friday morning, she did little to disguise
her fury -- though she shoulders some of the blame herself.

BofAML: Cyprus defaults,
exits, confidence is shaken – in this scenario, the possibility of
a country exiting the Eurozone could revive contagion risks, only to
be mitigated by much more forceful policy reactions.

Of course the authorities
anticipate some of these problems, but there are always new ones.
Particularly after the initial shock of control imposition wears off,
the population turns from productive effort to finding ways to game
the system. Some cultures are more resistant than others to this
change in character, but in all cases social cohesion and respect for
law are eroded over time.

Raiding Cypriot
accounts will not save the banking system – Sober
Look

The Eurosystem's exposure
to Cyprus is simply insignificant on a relative basis. The ECB's
balance sheet is still massive. It can generate more than enough
interest income in a few months to cover the losses of Cypriot banks'
defaulting on their ECB loans. So why throw good money after bad?

Cypriot President
Nicos Anastasiades, seeking a last-minute reprieve from financial meltdown at
talks in Brussels on Sunday, has a "very difficult
task" ahead of him if he is to save the island's economy, a government
spokesman said.

A gathering of
eurozone finance ministers aimed at sealing a bailout deal for Cyprus before a
Monday deadline set by the European Central Bank was delayed by at least two
hours, as talks between the Cypriot President and the heads of the EU Council,
commission, IMF and ECB ran late.

TIMELINE: Anastasiades to lenders: do you want
to force me to resign? – Cyprus
Mail

Archbishop: those who are to blame should be
put on trial – Cyprus
Mail

The prominent role of
Cyprus's financial services is probably over anyway, irrespective of the actual
content of the forthcoming agreement between the troika and Cyprus. I put together
some simple tables showing the structure of the economy in Cyprus and in three
other countries that suffered from massive banking crises during the past few
years: Ireland, Iceland and Latvia (see a December 2011 policy contribution of
mine comparing the adjustments of these three countries). Here are some
observations.

Cyprus clinched a last-ditch deal with international lenders to shut down its
second largest bank and inflict heavy losses on uninsured depositors, including
wealthy Russians, in return for a 10 billion euro bailout.

The market kneejerk
reaction to the Cyprus solution may already be behind us, and if not, is not
likely to hold much longer as a number of ugly precedents have been set that
are likely to weigh on the Euro from here.

Guest post: Russia
right to refuse Cyprus bail
out but should back a strong EU
– beyondbrics
/ FT

At this point it’s
safe to say that if the Cypriot government was trying to coddle Russian
depositors by initially agreeing, way back on March 16, to penalise small
depositors along with larger ones, that has backfired badly.

Ken Veksler: Cyprus is saved. Well apparently and perhaps only for
now... Having reached a “deal” at the last minute last night, I don’t get the
sense anyone is breathing too big a sigh of relief, if I’m honest.

Historically,
political expediency has trumped EU law. Although it would not be clear cut or
easy – and involve a legal stretch – we believe that in order to take a swift
decision and avoid a Treaty change EU leaders could (and most likely would) use
existing provisions in the EU treaties to allow for a Cyprus euro exit.

One of the mysteries
of the Cyprus crisis has been the lack of response from Russia, despite the obvious strategic opportunities,
not just to protect its offshore deposits, but also to exploit the island’s
strategic location and its military and energy potential. A possible
explanation is that Europe’s indecision also paralyzed Russia -until
last night.

Flash Analysis: Cyprus kept
in the euro, but at what cost?
– Open
Europe

Cypriot bank restructure: The good, the bad and
the ugly – TradingFloor

Neil Staines: After
the modest bounce in risk assets on the open to this week’s financial markets
... I would anticipate that the EUR will lose its lustre, and that we will be
trading at new lows for 2013 by the time we enter April.

To most, the recent
decision to fund the bailout of the Cypriot banking system through a sizable
tax on larger depositors is little more than a news story.However my view is that it risks changing the
behavior of large depositors.

Cyprus: The
deal that is not a deal but an understanding – TradingFloor

Steen Jakobsen: This
weekend's 'deal' has no winners - only losers. It left European decision-making
bleeding and without hope of recovery as the EU Commission and IMF exchanged
harsh words all in the name of a power game, never for the sake of future
Europeans.

A rescue programme
agreed for Cyprus on Monday represents a new template for resolving euro zone banking
problems and other countries may have to restructure their banking sectors, the
head of the region's finance ministers said.

Capital controls on Cyprus seem
to have been avoided (or not?)
– Bruegel

Overall, a good deal
has been reached given the bad circumstances of end of last week. It is now
crucial to provide a credible timeline for the opening of banks. Moreover, the
Cypriot authorities should clarify asap what “administrative measures” are exactly
contemplated. Those measures should not limit capital flows across Cypriot
borders as otherwise they would be capital controls. Capital controls would
ultimately mean that a euro anywhere is not a euro everywhere anymore.

Why the new Cyprus deal
sows the seeds of the next European crisis – Wonkblog
/ WP

The next time there is
a banking panic in Europe, it will move much faster, and be much harder to
control, than those of the recent past, as depositors try to get ahead of
future losses and capital controls. And that’s a scary proposition indeed.

Several big questions
remain. The most immediate concerns when Cypriot banks will reopen, what will
happen to deposits at that time, and how the Cypriot government will respond.
Major deposit flight is expected, and it is widely anticipated that temporary capital
controls will be imposed.

Coming soon to uninsured deposits near you – Free exchange / The Economist

In other words, Cyprus is absolutely a unique case, BUT if trouble
should come to banking sectors elsewhere in the euro zone hitting uninsured
depositors would seem a sensible way to go.

Cyprus may impose
controls on the movement of capital but only for a temporary period of time,
the European Commission said on Monday, hours after the island sealed a deal to
close its second-largest bank in return for international aid.

Cyprus's financial crisis has put Austria's centuries-old tradition of banking secrecy
under fresh scrutiny, posing a potential political problem for Vienna as it faces European Union and U.S. pressure to crack down on tax cheats.

Hugo Dixon: The bailout deal that Cyprus reached with its euro zone partners makes the
best of an extremely bad situation but there are lingering doubts on capital
controls and the effect the debt will have on the economy, the author writes.

Following the deal
between Cyprus and its international creditors on a bailout, there are just as many
questions as answers, particularly surrounding the imposition of capital
controls. Here our reporters address some of the most pressing issues.

Dutch finance minister
Jeroen Dijsselbloem, the current head of the Eurogroup, held a formal,
on-the-record joint interview with Reuters and the FT today, saying that the
messy and chaotic Cyprus solution is a model for future bailouts. Those
comments are now being walked back, because it’s generally not a good idea for
high-ranking policymakers to say the kind of things which could precipitate
bank runs across much of the Eurozone. But that doesn’t mean Dijsselbloem’s
initial comments weren’t true; indeed, it’s notable that no one’s denying them
outright.

And from here forward,
depositors in European banks know that they are on notice, from no less than
the Eurogroup president: If your money is in a bank that runs into problems,
you’re going to pay. It is an admirable victory for market purism, and a loss
for those who want to keep the European financial system in business. Djisselbloem
is relatively new in the job, having been finance minister only since November
and Eurogroup president since January. It is not an auspicious start.

Javier Solana: Today,
the small, divided island of
Cyprus is facing yet another economic storm. But
there is light on the horizon: economic hope in the form of huge offshore gas
reserves, which promise not only to transform the island’s economy, but also to
improve regional cooperation and revive reunification efforts.

Ironically, the euro
area can thank the Cypriot parliament and Russia for rebelling the first time
around, thereby backing the Cypriot government into a corner and averting the
Troika’s initial policy mistake of acceding to the Cypriot government’s demands
to impose the levy on insured deposits.

No monetary union can
expect long to survive this sort of self-inflicted political battering. If Europe can make such a horlicks out of tiny Cyprus, just think what might happen when the crisis
once again laps at the doors of larger economies such as Italy, Spain and Portugal.

I'm writing this brief
explanation for those who are unsure about the status of deposits held in UK outposts of Cypriot banks, and to confirm the
situation for people with deposits in Cypriot banks in Cyprus itself.

Cyprus Shows Trust in ECB Is Misplaced – View
/ BB
Megan Greene: Markets have weathered potential crises in Italy and Spain with
surprising calm, secure in the knowledge that the ECB will save the day if
needed. This was always a false assumption, as events in Cyprus have made clear.

The trick of imposing
much of the short term cost on Russians suspected of being criminals or at
least shady has just made it all that much easier.Now, of course, there will almost certainly
be a sharp decline in Cypriot GDP, just as in Greece and other victims.But Cyprus will not leave, and the euro will continue.

Gideon Rachman: In the
end, the Cypriots swallowed the bitter medicine. Facing national humiliation
and a bleak future many complain their small nation has been forced to succumb
to the will of a larger, merciless power – Germany.

UPDATE 47

The crisis in Cyprus not
only threatens the Cypriot economy, but might also undermine the country’s
relations with key partners and allies – europp
/ LSE

The council of
Ministers will appoint criminal investigators in the coming days with a “clear
and wide-ranging mandate” to find those responsible for bringing Cyprus to the brink, President Nicos Anastasiades
said last night.

Our view: Eurogroup deal designed to kill off Cyprus, not
cure it – Cyprus
Mail

We put ourselves in
the position from which there was no escape but this did not justify the
punitive nature of the bailout agreement imposed in the early hours of
yesterday. The medicine administered by the Eurogroup, on the recommendation of
the IMF and the ECB, is designed to finish off rather than cure the patient.

MORGAN STANLEY: Cyprus Is
No Longer A Full Member Of The Eurozone – BI

Cyprus might need more
financial help or even a restructuring of public debt at some point * As taboos
were broken, concerns of an eventual break-up of the Euro area are back on the
table * Europe still lacks a coherent strategy on how to share the burden of
adjustment and is still far away from overcoming the crisis, both economically
and politically * Investors likely to remain cautious

Cypriots face
draconian controls over how they spend their money, use debit cards or access
their savings lasting beyond May as Cyprus tries to stop capital flight ahead of
inflicting major losses on depositors at the island’s biggest bank.

Russian Withdrawals Quantified As Cyprus
Central Bank Set To Expand Emergency Credit By Up To €3 Billion – ZH

Cypriots face
draconian controls over how they spend their money, use debit cards or access
their savings lasting beyond May as Cyprus tries to stop capital flight ahead
of inflicting major losses on depositors at the island’s biggest bank.

No signs of more bank withdrawals in euro zone:
Dijsselbloem – Reuters

The head of the euro
zone group of finance ministers, Jeroen Dijsselbloem, said on Tuesday there
were no apparent signs of increased withdrawals of savings within the euro
zone.

A rescue program
agreed for Cyprus will serve as a model for dealing with future euro zone
banking crises and other countries will have to restructure their banking
sectors, the head of the region's finance ministers said.

Bailout Insights: What Cyprus
Tells Us about Germany's
Character – Spiegel

The Cypriot government
was willing to do anything to save its banking industry. Yet Berlin, driven by
a deep-seated fear of tax havens, sought the opposite. The resulting deal may
have driven a stake through the heart of the euro-zone's much ballyhooed
banking union.

It seems to escape
everbody, but that doesn't make it any less true: people from Portugal to Spain
to Italy to Greece to Cyprus and Ireland are worse off today than they were
when they first adopted the euro. Moreover, their economies are all getting
worse as we speak and projected to plunge further… The only reason for Europe's
Mediterranean nations to remain in the eurozone and the EU will be bullying
from Brussels and Berlin. It's this bullying from the core, from those who
preach union above all else, which will be the undoing of the entire project,
but after a lot more pain of the same kind that now hit the Cypriots will have
spread north (the rot won't stop).

It is not yet too late to drop the idea of
capital controls in Cyprus – Bruegel

The purpose is to
allow as smooth of a restructuring of the two largest banks in Cyprus. This means there will likely be continued
limits on how much can be taken from bank accounts. In order to separate the
insured depositors, who in Cyprus 2.0 will be left whole, and the uninsured
depositors, the ability to move money between accounts will also likely be
limited. The important take away, though
is that these are not the kind of capital controls that are meant to address
the external deficit or impact cross border settlement as in the Target2
system. Only if capital controls venture into this area, will talk Cypriot euro
make sense

A lot of it of course
is some sort of desire to "belong to Europe" and all that, which strongly influences
both Greece and Cyprus, and continues to attract such possible
joiners as Poland… While this devaluation might make it easier for Cyprus to recover several years down the road, that
recovery would indeed be several years down the road, and in the meantime there
would be a lot of painMoody's: Cyprus Euro Exit Risk
Substantial – ZH

The punishment regime
imposed on Cyprus is a trick against everybody involved in this squalid saga,
against the Cypriot people and the German people, against savers and creditors.
All are being deceived.

Cypriots queued calmly
at banks as they reopened under tight controls imposed on transactions to
prevent a run on deposits after the government was forced to accept a stringent
EU rescue package to avert bankruptcy.

Cypriot banks reopen
with tight controls imposed on transactions to prevent a run on deposits after
the government was forced to accept a stringent EU rescue package to prevent
the country from going bankrupt.

In sum, compared to
the initial proposal that taxed insured deposits while leaving more junior
creditors untouched, the final deal gets the creditor prioritization right,
hits uninsured deposits at the two top banks hard while leaving insured
depositors untouched, and gives the government broad powers to restructure
banks and impose capital controls…Still, the contagion to investors elsewhere
is likely to be significant.

The capital controls in Cyprus and
the Icelandic experience – voxeu.org

Cyprus has imposed temporary capital controls. This column sheds light on how
temporary and how damaging they are likely to be, based on Iceland’s
experience. The longer controls exist, the harder they are to abolish.
Icelandic capital controls, which have been ‘temporary’ for half a decade,
deeply damage the economy by discouraging investment.

Big depositors in Cyprus's largest bank stand to lose far more than
initially feared under a EU rescue package to save the island from bankruptcy,
a source with direct knowledge of the terms said on Friday.

Customers will have
37.5 percent of their deposits above this amount converted into shares with
full voting rights and access to any future Bank of Cyprus dividend, the
Nicosia-based central bank said in an e-mailed statement. A further 22.5
percent will be temporarily withheld to ensure the lender meets the terms of
its recapitalization, as agreed under Cyprus’s loan agreement with
international creditors, the central bank said.

The 24-page Memorandum
of Understanding (MoU) published in Cypriot press on Monday (1 April) sets out
a detailed programme of reforms including tax rises, spending cuts,
privatisation of state assets and healthcare and pension reforms.

Cypriot Finance
Minister Michael Sarris quit on Tuesday after concluding talks with foreign
lenders on a bailout that forced the island to slap unprecedented losses on
bank depositors in return for aid.

Life after the Fall: The Aftermath of the
Cypriot Banking Collapse – Spiegel

Cypriots are paying a
high price for the collapse of their banking system. A leading lawyer, a real
estate broker and a bar owner have already begun the process of searching for a
future -- for themselves, their companies and their country.

Cypriot Finance
Minister Michael Sarris quit amid a probe into the island nation’s economic
crisis, leaving the government eight days after helping it clinch an
international bailout to stave off financial collapse.UPDATE 57

Europe, it turns out, is studded with vulnerable,
contagious tax islands, and their availability only compounds Russia’s deeper problem: it is both too corrupt and
too paranoid to keep its billions at home.

The ‘Cypriot
precedent’ and experiment with capital controls, a first for the eurozone, are
still reverberating around the EU. Gilles Thieffry, a Partner at GTLaw, Geneva,
writes on possible legal implications.

The euro-zone bailout
of Cyprus exposed deep divides within Europe and also brought back the specter of the euro
crisis. In addition to harming the island nation's economy, errors made in
negotiating the deal will ultimately be a setback to strategic EU interests as
well.

The European
Parliament will seek greater protection for depositors of crisis-hit banks in
the wake of the Cyprus bailout as it weighs changes to proposals aimed at taking taxpayers off
the hook for future rescues.

The controversial
rescue of Cyprus moved a step closer to reality today as the Eurogroup of finance
ministers said that the European Stability Mechanism (ESM), the euro area’s
rescue fund, should give the go-ahead to financial assistance worth €9 billion
($11.8 billion) by April 24th.

Euro zone finance
ministers backed a 10 billion euro bailout for Cyprus on Friday and the European Commission said it
would try to help the island's economy grow again with better use of EU
structural funds.

Euro-zone finance ministers are set to agree on a bailout package for Cyprus on Friday, but news
this week that the country will need to raise an additional 5.5 billion
euros has raised new questions. Germany's parliament is
likely to approve the aid, but many are calling for conditions to be imposed.